MGMT673 Problem Set 5 Complete Solution

Question: #8560

MGMT 673 Problem Set 5

1.   For each of the following economic conditions, place an X in the table to indicate the appropriate range in the Aggregate Supply Curve
Condition   Keynesian   Intermediate   Classical
Unemployment is above the historical average
The nation’s factories are running at capacity
Any increase in GDP will be accompanied by high inflation
The nation is suffering through a severe recession
A mid-point in the business cycle expansion phase
GDP can increase without an increase in the Price Index

2.   Many exogenous factors can cause a shift in the Aggregate Supply Curve. For each of the following factors, place an X in the table to indicate how the AS curve would shift.
Factor    AS shift right
(increase in AS)   AS shift left
(decrease in AS)
World oil prices increase substantially
Environmental Protection Agency enacts broad pollution restrictions
Business taxes are reduced
Internal combustion engine fuel efficiencies are greatly increased
Adverse winter weather persists for months more the normal
New restrictions slow immigration
Federal minimum wage is increased by 30%

3.   Earlier we learned that Demand, which we now call Aggregate Demand, is comprised of 4 components: Consumption (C), Investment (I), Government spending (G), and Net Exports (NE). Any exogenous factor that increases any of the component(s) will also increase Aggregate Demand. For each of the following, place an X to indicate the component affected and an R (increase) or and L (decrease) to show whether the AD curve shifts Right or Left. Consider only the primary effect.
Factor   C   I   G   NE   R or L
Real interest rate decreases
Consumers and executives become more confident in the economic future
The stock market rises
China’s economic growth slows
Congress increases spending for in the current fiscal year
Tariffs are imposed by many countries to protect domestic employment
The US Import/Export bank eliminates guarantees for loans to foreign airlines to purchase Boeing aircraft
Congress enacts tax incentives for firms purchasing new equipment and facilities

4.   For each of the following government economic actions, place an X in the table to indicate whether the action is fiscal or monetary policy.
Action   Monetary   Fiscal
Taxes are increased on the wealthiest 1% of households
The Fed purchases Mortgage-backed securities (MBS)
The US Treasury borrows money to finance increased government spending
The federal government provides a rebate to first time home buyers
The President signs and enacts the Affordable Care Act
The Fed promises to keep interest rates near zero for an extended time

5.   For each of the following government actions, insert the original and shifted AD curve. Insert an arrow to show the shift in the AD curve. Here’s an example:

a.   While in a steep recession, the federal government enacts a stimulus program of increased spending and reduced taxes. Inflation does not increase.

b.   In Argentina, the government increases spending in order to win more votes in the upcoming election. Inflation increases substantially but GDP increases slightly (demand pull inflation).

c.   The central bank lowers interest rates to near zero, C and I increase modestly and inflation remains below the target rate of 2% annually.

d.   A housing market bubble collapses, the economy enters a recession but previously high inflation falls to near zero.